Challenger Infrastructure Fund

Just as Challenger Infrastructure Fund was due to delist, the group received notification from the Australian Tax Office that it has been ‘selected for an audit in relation to the taxation treatment of certain foreign income’. In short, the ATO believes it might be entitled to tax on some of CIF’s past foreign earnings, whereas CIF believes it is exempt, having already paid tax in foreign jurisdictions on those earnings. We’re not experts, but it’s the interpretation of section 23AJ of the Income Tax Assessment Act that is up for debate.

In response, CIF has set aside $40m of the proceeds that were otherwise due to be sent to securityholders on 2 November. This amount should be sufficient to cover the amount of tax in question, plus an allowance for any interest accrued and fines should the group be forced to pay. It also includes an amount of $1m set aside for potential legal costs. The group strongly believes that it doesn’t owe any further tax and is prepared to fight if the ATO arrives at a different conclusion after conducting its audit.

The effect of this is that the initial distribution has been reduced from $1.29 to $1.16 (setting aside $40m for this issue) and the initial payment date moved back a week or so. The stock will now cease trading on 29 October. The date for any final distribution has now also likely been pushed back. Securityholders still stand to collect a further 11 cents per security should Inexus be able to roll its debts, and if successful any such payment is likely be forthcoming early next year. But the tax amount might take longer to resolve, especially if the matter ends up in court. So even in the best outcome, where securityholders ultimately recover the full 13 cents, it might not be for a while. With highly qualified tax specialists at CIF and the ATO holding differing opinions on the matter, our non-expert guesses at the eventual outcome are unlikely to be enlightening. But we do note the rather sharp discrepancy between CIF’s confidence in a successful outcome and today’s market reaction, where the stock fell 12 cents. With a negative outcome now almost fully priced in, it’s not time to sell. But we’re not confident enough to commit fresh capital either, given the uncertain outcome. Ergo, HOLD.

Note: The model Income and Growth portfolios own Challenger Infrastructure Fund securities.